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MARKETING METRICS
TS. LÊ THÙY HƯƠNG
KHOA MARKETING
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Chapter 5
Customer Profitability
 5.1 Customers, Recency, and Retention 3

 Customer Counts: These are the number of customers of a firm for a

specified time period.
 Recency: This refers to the length of time since a customer’s last purchase.
A sixmonth customer is someone who purchased from the firm at least
once within the last six months.
 Retention Rate: This is the ratio of the number of retained customers to
the number at risk.
Purpose: To monitor firm performance in attracting and retaining
customers
5.2 Customer Profit 4

 Customer profit (CP) is the profit the firm makes

from serving a customer or customer group over a
specified period of time.
 Customer Profitability: The difference between
the revenues earned from and the costs associated
with the customer relationship during a specified
period.
Purpose: To identify the profitability of individual
customers.
5.2 Customer Profit 5

 EXAMPLE: A catalog retailer has grouped customers in

10 deciles based on profitability
5.2 Customer Profit 6
5.2 Customer Profit 7
5.2 Customer Profit 8
 5.3 Customer Lifetime Value 9

 Customer Lifetime Value (CLV): The present value of the future cash
flows
 When margins and retention rates are constant, the following formula
can be used to calculate the lifetime value of a customer relationship:

Purpose: To assess the value of each customer.

5.3 Customer Lifetime Value 10
 EXAMPLE: An Internet Service Provider (ISP) charges $19.95 per
month. Variable costs are about $1.50 per account per month. With
marketing spending of $6 per year, their attrition is only 0.5% per
month. At a monthly discount rate of 1%, what is the CLV of a
customer?
 5.3 Customer Lifetime Value 11

Exercise:
 TH True milk sells fresh milk for 8,000 VND a box.
Depreciation of unit fixed costs is VND 500, unit variable
cost is VND 5,500. Retention Rate = 85%Discount Rate =
1%. Calculate CLV of a customer.
5.4 Prospect Lifetime Value 12
 Prospect lifetime value is the expected value of a
prospect. It is the value expected from the prospect minus
the cost of prospecting.

Purpose: To account for the lifetime value of a newly acquired customer

(CLV) when making prospecting decisions.
5.4 Prospect Lifetime Value 13
5.4 Prospect Lifetime Value 14
5.4 Prospect Lifetime Value 15
Exercise
A company named Lotus plans to spend $100,000 on an sale
promotion campaign reaching 50,000 buyers. If Lotus expects
5,000 will repurchase with initial price of $5 per product and total
unit cost of $3 and the CLV of the acquired customers is $20.
Should the company carry out this sale promotion campaign?
Calculate its Break-Even Acquisition Rate.
 5.5 Acquisition Versus Retention Cost 16
 The firm’s average acquisition cost is the ratio of acquisition spending to the number of
customers acquired.
 The average retention cost is the ratio of retention spending directed toward a group of
customers to the number of those customers successfully retained.

Purpose: To determine the firm’s cost of acquisition and retention.

 5.5 Acquisition Versus Retention Cost 17

EXAMPLE
During the past year, a regional pest control service spent $1.4 million and
acquired 64,800 new customers. Of the 154,890 customer relationships in
existence at the start of the year, only 87,957 remained at the end of the year,
despite about $500,000 spent during the year in attempts to retain the
154,890 customers.
Average acquisition cost is $1,400/64.8 = $21.60 per customer.
Average yearly retention cost is $500,000/87,957 = $5.68.
5.5 Acquisition Versus Retention Cost 18

Exercise
A coffee shop last month spent $7,000 on acquiring
1,000 new customers and $4,000 on 700 customers
remaining at the end of the month. Compare Average
acquisition cost and Average yearly retention cost of
the coffee shop.